- Euro area falls back into deflation, increasing pressure on the ECB to ease policy next week.

OUTLOOK

UPCOMING TODAY: New Zealand terms of trade for fourth quarter. Offshore the key events are the RBA Board meeting and Chinese PMI’s for February.

CURRENCY: Currency markets will follow activity. New Zealand’s terms of trade and the RBA decision suggest weakness, but Chinese PMIs may provide support. GBP, EUR, and USD have weak expectations from PMIs, so there are risks of gains.

RATES: Quiet session for kiwi rates, but given global moves it seems likely they will open a touch lower.

GLOBAL MARKETS OVERVIEW: There was plenty to ponder overnight with end-of-month flows and additional monetary policy support the biggest influence on market moves. China eased its reserve requirement ratio by 50 bps to 17% effective from 1 March. The move comes amid the recent uptick in capital outflows and softening in economic activity. Alongside comments from Saudi Arabia that it would work with other producers to ensure a stable market this supported oil/energy prices. Other commodities generally had a positive session too. Lifts in commodity prices and a resilient US consumer helped support the major US bourses (+0.3-0.5%). In the Euro zone the flash CPI release for February (-0.2 y/y) was worse than expected and suggests the currency union has fallen back into deflation. This will raise the pressure on the ECB to further ease monetary policy at its upcoming meeting on 10 March. The data weighed on the euro and encouraged a rally in euro area sovereign bonds, with the yield on 10-year German and French bonds declining 4bps and 3bps respectively. Other sovereign bond markets have also rallied, with 10-year UK gilt yields 6.2bps lower, and 10-year UST yields down 1.4bps.

ANZ’S ASSESSMENT

CENTRAL BANKS BACK INTO ACTION. Monetary policy considerations were front and centre overnight. China’s central bank cut its reserve requirement ratio by 50bps to 17% amid capital outflows and softening economic activity. China’s foreign exchange reserves had fallen sharply by USD99bn in January, suggesting that the country experienced a large amount of capital outflow during the month despite a record trade surplus of USD63.3bn. The RRR cut is expected to immediately inject about RMB650bn into the banking system, alleviating the liquidity drain. Capital outflow pressures may persist in 2016 on the back of RMB depreciation expectations and US policy rate normalisation. Thus, our Chinese team expect that the PBoC may need to further lower the RRR in 2016, depending on capital outflows. With inflation to remain low there is also expected to be further cuts to interest rates. However, policy makers are likely to remain cautious about lowering the benchmark lending and deposit rates, given the current RMB depreciation pressure. Other tools, such as the standing lending facility are expected to be experimented with to help guide market interest rates lower.

OVERNIGHT SPECIFICS AND KEY EVENTS

- The US data flow was uninspiring, triggering little lasting reaction on markets. The regional PMIs were mixed, although the most closely watched Chicago index suffered a notable decline to 47.6 in February from 55.6. Pending home sales were also weaker than expected, falling by 2.5% m/m and 0.9% y/y in January. From Lawrence Yun, Chief Economist at the National Association of Realtors (which publishes the statistics): "While January’s blizzard possibly caused some of the pullback in the Northeast, the recent acceleration in home prices and minimal inventory throughout the country appears to be the primary obstacle holding back would-be buyers. Additionally, some buyers could be waiting for a hike in listings come springtime."

- Euro area: Disappointing flash HICP for the euro area, falling 0.2% y/y in February. Of particular concern was the drop in core inflation to 0.7% y/y (last 1.0% y/y). Services inflation (44% of the index) eased to 1.0% vs 1.2% y/y in January. Non-energy-industrial goods inflation eased to +0.3% y/y (0.7% y/y) and energy prices fell 8.0% y/y (5.4% y/y in Jan). The data increase pressure on the ECB to ease further policy next week, but building evidence that negative interest rates are having a number of unintended consequences could also have a say. Despite the G20 communique, the exchange rate has a role to play in supporting price stability. There must be no appetite for a stronger euro, and with US core inflation ticking higher (core PCE+1.7% y/y in Jan), EUR/USD downside may re-emerge.

- UK: The number of mortgage approvals rose to 74.58k in January ahead of the buy-to-let stamp duty increase in April. Meanwhile, January loans to non-financial businesses rose GBP6.3bn and January consumer credit rose GBP1.6bn. It all shows a vibrant domestic economy and one that is at odds with the negative interest rate view that has prevailed early this year. GBP upside, however, is constrained by the uncertain ‘Brexit’ climate.

- The major US equity bourses pushed (0.3-0.5%) higher supported commodity prices, a resilient domestic consumer and Chinese stimulus. After a poor start in the wake of declines on Asian markets, European bourses regained lost ground to be flat to modestly higher on the day. The UK FTSE 100 was unchanged, Germany’s DAX fell 0.2%, France’s CAC rose 0.9%, Spain’s IBEX 35 increased 1.3% and Italy’s FTSE MIB improved 0.8%.

- In fixed income markets, end of month flows, China monetary support and deflation in the Eurozone had the largest influence. Euro area sovereign bonds yields fell with the drop in core inflation. The yield on 10-year German and French bonds declined 4bps and 3bps, respectively. Other sovereign bond markets also rallied, with 10-year UK gilt yields 6.2bps lower, and 10-year UST yields down 1.4bps.

- Commodity prices generally had a positive session. Oil prices gained on Chinese stimulus and comments from Saudi Arabia that it would work with other producers to ensure a stable market. Industrial and precious metals also gained, but grain prices slipped with global wheat stocks heading for their highest levels in three decades.

NZD/USD: TESTING…

NZD/USD consolidated overnight unable to build on an earlier push lower. US data weakened. This morning the NZD will look to the Q4 Terms of Trade release where we expect a 3% decline to weigh on NZD, against the market who is expecting the terms of trade to be unchanged. In the US overnight it is the ISM that will garner attention with expectations for a modest improvement, but for it to remain contractionary.

Expected range: 0.6540 - 0.6650

NZD/AUD: RBA…

After pushing lower yesterday, markets will look to the RBA decision. There is no change in policy expected, but markets will be looking for a dovish tilt to the outlook, given the global backdrop. Should this fail to eventuate then this cross will remain under-pressure.

Expected range: 0.9160 - 0.9280

NZD/EUR: DEFLATION, AND ACTIVITY

European wide CPI dropped back into deflation last night as signalled by regional CPI’s prior. With the final Markit PMIs expected to confirm activity is also slowing tonight, this raises pressure on the ECB for next week.

Expected range: 0.5950 - 0.6120

NZD/JPY: PRODUCTION BOOST...

Yesterday industrial production surprised to the topside in Japan.

Expected range: 73.6- 75.80

NZD/GBP: PMI ACTIVITY…

Markets are expecting a modest reduction in the UK manufacturing PMI tonight, but for it to remain expansionary. This should all things considered help reinforce that GBP has found its level for now.